The Impact of Eliminating the 20-F Reconciliation Requirement for IFRS Filers on Earnings Persistence and Information Uncertainty

Tony Kang · Gopal V. Krishnan · Michael C. Wolfe

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and XBRL

Abstract

SYNOPSIS: On November 15, 2007, the U.S. Securities and Exchange Commission (SEC) eliminated the requirement that foreign private issuers reporting under International Financial Reporting Standards (IFRS) include a reconciliation to U.S. GAAP in their 20-F filing. To the extent that the reconciliations had information content, it is possible that the information environment of IFRS filers deteriorated in the post-reconciliation period, unless they voluntarily improved disclosure quality. Using difference-in-differences tests, we examine whether there was any change in the persistence of earnings and analyst forecast dispersion after the new regulation. We find that earnings persistence increased (did not increase) and analyst uncertainty measured by the forecast dispersion did not increase (increased) for firms domiciled in weaker (stronger) investor protection countries. These results suggest that firms from a weaker investor protection environment had a greater incentive to “signal” the quality by voluntarily improving the disclosure quality in the post-reconciliation period to compensate for any possible information loss from no longer providing the reconciliation. Our findings also suggest that the elimination of the reconciliation requirement did not have a uniform effect on IFRS filers and that the effect varies with the firm's home country reporting environment. JEL Classifications: M41

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References

2003Earnings management and investor protection: an international comparison 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2008The law and economics of self-dealing 2000The effect of international institutional factors on properties of accounting earnings 2008International Accounting Standards and Accounting Quality 1996Corporate Disclosure Policy and Analyst Behavior.2004Costs of Equity and Earnings Attributes 2001Financial accounting information and corporate governance

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